The Shiny Metal Suddenly Became “Not So Shiny”

That long-awaited correction in the currencies and commodities came full force on Friday. The selling of the currencies and commodities and buying of dollars was reminiscent of the days following the collapse of Lehman Brothers in the fall of 2008. The dollar index surges 1.7% on Friday… And gold… The shiny metal suddenly became the “not so shiny” metal, as it sold off by $46 in one day… And it hasn’t stopped there either… Gold has sold off another $16 overnight to $1,143…

So… What caused this bloodletting on Friday? Well, believe it or don’t, but the Jobs Jamboree was the proverbial straw that stirred the drink on Friday. I know, I know, you’re saying, “But Chuck, you said on Friday that if the Jobs Jamboree numbers were good for the US, the dollar would get sold!” Well… That’s true, I did say that, but I also said something very important to this conversation, and it is that “if we remain in the trading theme that rewards the dollar when data is strong then we would look to see the dollar sold off more.”

Apparently, the trading theme that held a grip on the markets since early spring of this year was thrown to the curb, and the dollar drove off in a hurry! Is this a change in the trading theme we’ve been waiting for? I certainly hope so! I really do! For if we were to get back to fundamentals, and not this “opposite-day” trading then it would certainly be a good thing for yours truly!

I’m not sure we can call it a true reversal until we see other data prints in the next few days, like retail sales – which will print later this week – or the trade deficit – which prints in the middle of the week. But what we saw on Friday was something! A 1% move for a currency in one day is considered to be quite strong. A 1.7% move by the dollar index would be even stronger than “quite strong”, eh?

But… On Friday, we saw stocks soar on the Jobs Jamboree figures, which fundamentally they should have, and currencies and commodities break away from the tie to stocks… Let’s hope that continues, for you all know that I’m still of the belief that stocks are overbought, and when the US economy does the double dip, they will get sold..

The overnight trading session in Asia saw the traders there attempt to sell dollars and buy currencies, which brought the euro (EUR) and other currencies up in value from Friday’s close. However, the European trading session is back to selling the currencies and buying dollars this morning.

There was good news on the deficit side of the ledger over the weekend, and that was the US Government announcing that the TARP expenses will be $200 billion less than originally forecast… Of course I’m sure the government will find “other uses” for that $200 billion, right? I mean, you give the government the OK to spend that much on one thing, you can bet your sweet bippie that the lawmakers will find “another” use for the $200 billion! But for now, we can be happy that as taxpayers we didn’t see $200 billion go out the door!

We have a “wall of rate decisions” to deal with this week from the Bank of Canada (BOC), The Reserve Bank of New Zealand (RBNZ), The Swiss National Bank (SNB), and the Bank of England (BOE)… Of the four, the only central bank that could be seen to raise rates would be the RBNZ, but I don’t expect any of these to be raising rates at this time.

We also have Big Ben Bernanke speaking today here in the US, and overseas we have European Central Bank (ECB) President, Trichet, speaking… Hmmm… You don’t think… Nah… This is just a co-inky-dink… Or is it? You know me, and the conspiracy blood in me is rushing to my brain, telling me to think about this. Could these two be setting up the markets for an announcement of coordinated intervention to support the dollar? Geez Louise, let’s hope not!

OK… I had to throw that out there, I don’t really believe this could happen right now, but… In my 17 years of following the currencies and writing about them, and trading them, I have to tell you that I have seen this before… So, it technically “could happen”… I just don’t think it will at this time.

Well… Even the Japanese got caught up in the dollar buying on Friday… Since March, yen (JPY) has enjoyed both worlds of dollar strength and dollar weakness, as it was seen as a “safe haven” when there was dollar strength, and an alternative currency to buy during dollar weakness… But, like I said, even the Friday selling caught yen off guard, and it took a big swing downward versus the dollar… Falling from the 87 handle to the 90 handle!

The high yielding commodity currencies really took one on the chin, proving once again that the currencies that move the most on the upside, are the ones to lose the most on the downside… On Friday morning, I might have given a bad omen to the Aussie dollar (AUD), when my fat fingers typed that the Aussie dollar was 0.72 and change instead of 0.92 and change… UGH! Quite a few of you dear readers brought that to my attention… All I can say for myself is … Darn fat fingers!

So… What in the Jobs Jamboree got this ball rolling in the dollar’s favor on Friday? Well… According to the Bureau of Labor Statistics (BLS) job losses dropped sharply in November, as the total jobs lost were only 11,000… The jobless percentage also dropped from 10.2% to 10%… It didn’t look like the birth/death model that the BLS uses to adjust the number each month had much to do with this, what can only be called a “fabulous” report!

I had a few dear readers write to me and ask how the unemployment rate can fall from 10.2% to 10% when there were still job losses? Well, it comes down to the fact that when an unemployed person sees their unemployment benefits run out, they are “dropped” from the government’s unemployed list… So, apparently in November, we had quite a few unemployed people that saw their unemployment benefits run out… The stupid thing from this is obviously the idea that these people are “no longer looking for work”… HOGWASH!

So… That’s what got the markets all lathered up for a dollar rally on Friday, and carried through to this morning, albeit pausing in the Asian session, as I explained above.

Back to the BLS accounting for a minute though… I saw that the number of people that were “dropped from the list was 289,000”… So, we really had almost 300,000 more unemployed people that would have kept the unemployment rate at 10.2%… But what about all the previous months? I’ve seen some interesting data on all of this, that I’ll share with you as we go along this week.

Seasonal employment is causing some problems with the data also… So, keep that in mind…

I had a long conversation with a customer on Friday, before we moved, and we talked about the sell-off that was happening and whether or not it was a trend, etc. The thing that I wanted to express to him then and to you now is that the long term trend for the dollar remains in place, which is downward; the only way the US can repay the interest on the debt it has issued, is with cheaper dollars… So… Keep your focus on the long-term horizon… And use sell-offs like this as opportunities to buy at cheaper levels.

Canada also showed a nice gain in jobs on Friday… Canada’s economy created 79,100 jobs in November – the biggest one-month gain since September 2008 – busting through forecasts for a modest 15,000 job-increase. This rise eclipsed the 43,200 jobs lost in October and is consistent with an acceleration in growth in the economy. The unemployment rate edged down to 8.5% from 8.6% in October.

Then there was this… Federal regulators on Friday seized AmTrust Bank, a battered Cleveland thrift kept alive this year after local politicians pleaded with the government for a second chance.

AmTrust is the fourth-largest US bank or savings institution to fail so far this year – increasing the total to 128, the highest number of failures since 1992.

To recap… The Jobs Jamboree on Friday showed a measly loss of jobs of just 11,000, and an unemployment rate of 10% (versus 10.2% previously), this caused a huge swing in dollar buying, which is a reversal of the previous trading theme, and pushed non-dollar currencies down and gold down by huge amounts.

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and
Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

1 Comment on The Shiny Metal Suddenly Became “Not So Shiny”

The market is very volatile and a one day move in anything is nothing but a blip on the screen. It is really unproductive to write on something that might have been nothing more then profit taking or panic selling. The fundamentals for the USD have not improved and are just getting worse. The TARP money that the US is getting back is already being earmarked for other spending. Plus, what does 200 billion really do when we are running a 1.5 to 2 trillion deficit.